Property Mortgage Insurance (PMI)

Do You Need Property Mortgage Insurance?

What is mortgage insurance?

It's a financial guaranty that insures lenders against loss in the event a borrower defaults on a mortgage. If the borrower defaults and the lender takes title to the property, the mortgage insurer (MGIC, for example) reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower. (Mortgage insurance should not be confused with mortgage life insurance, which provides coverage in the event of a borrower's death, or homeowner's insurance, which protects the homeowner from loss due to damage from fire, flood or other disaster.)

Who is mortgage insurance for?

All home buyers can benefit. It allows them to become homeowners sooner, and it dramatically increases their buying power -- excellent benefits from a buyer's perspective. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

What does mortgage insurance do for borrowers?

Without the guaranty of mortgage insurance, lenders normally require a borrower to make a down payment of at least 20% of a home's purchase price, which can mean years of saving for some borrowers. This large down payment assures the lender that the borrower is committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment. With the guaranty of mortgage insurance, lenders are willing to accept as little as 5% or 10% down from borrowers.

Mortgage insurance fills the gap between the standard requirement of 20% down and an amount the borrower can more easily afford to put down on a purchase. A low down payment also allows borrowers to purchase more home than they might otherwise be able to afford. Without mortgage insurance, a borrower who has saved $10,000 for the required minimum 20% down payment would only be able to purchase a $50,000 home.With mortgage insurance (and income and credit permitting), the borrower could make a down payment of only 10% and purchase a $100,000 home with the $10,000! Or put $7,500 down on a $75,000 home and use the remaining $2,500 for decorating, investing, or buying a car or major appliance. Mortgage insurance broadens a borrower's options.

Who pays for mortgage insurance?

Generally borrowers do. An initial premium is collected at closing and, depending on the premium plan chosen, a monthly amount may be included in the house payment made to the lender, who remits payment to the mortgage insurer.

Property Mortgage Insurance Act Information

On July 29, 1999, the new Homeowner's Protection Act of 1998, also known as the PMI Act, regarding the cancellation of PMI takes effect. Private Mortgage Insurance (PMI) is required by lenders when a loan is originated and closed without a 20 percent down payment. This insurance protects the lender from default losses in the event a loan becomes delinquent. The PMI Act will enable homeowners with new loans originated after July 29, 1999 and who meet specified requirements to have their PMI canceled. If your loan was issued before July 29, 1999, CONTACT YOUR MORTGAGE LENDER FOR FURTHER INFORMATION ON CANCELLATION OF PMI.

Cancelling PMI

The law provides two situations in which borrower paid PMI may be cancel - it can be automatic or by request. Lender-paid PMI is excluded from these mandates, but requires an up front disclosure to the borrower about lender-paid PMI.

• Automatic: In general, when the homeowner's equity position reaches 22 percent of the original value of the property, the mortgage servicer must automatically cancel the PMI. The borrower must be current in making payments for automatic cancellation to apply. Different requirements exist for "high risk mortgage loans, as defined by government-sponsored entities (i.e. Fannie Mae and Freddie Mac). CONTACT YOUR MORTGAGE LENDER IF YOU FIT THIS CATEGORY.
• By Request: Homeowners can request cancellation of the PMI when their equity position reaches 20 percent of the original value of the property, if they meet certain criteria. CONTACT YOUR MORTGAGE LENDER FOR ITS CRITERIA LIST.

Enforcement

HUD's Department of Consumer and Regulatory Affairs and the RESPA Division has no enforcement authority pertaining to the new PMI Act. Inquiries should be presented to your lender using the Qualified Written Request format. Under Section 6 of RESPA, lenders must acknowledge and take corrective action toward resolving questions that you raise in your Qualified Written Request.

Complaints about a lender

To complain about a lender who does not comply with the PMI Act, please contact the appropriate federal regulator.